CenturyLink, Inc. (NYSE:CTL) shares are up more than 12.11% this year and recently decreased -0.69% or -$0.13 to settle at $18.70. Synchrony Financial (NYSE:SYF), on the other hand, is down -23.21% year to date as of 08/06/2018. It currently trades at $29.65 and has returned 0.47% during the past week.
CenturyLink, Inc. (NYSE:CTL) and Synchrony Financial (NYSE:SYF) are the two most active stocks in the Telecom Services – Domestic industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.Growth
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect CTL to grow earnings at a -14.39% annual rate over the next 5 years. Comparatively, SYF is expected to grow at a 17.17% annual rate. All else equal, SYF’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 51.05% for Synchrony Financial (SYF). CTL’s ROI is 2.90% while SYF has a ROI of 24.20%. The interpretation is that SYF’s business generates a higher return on investment than CTL’s.Cash Flow
Cash is king when it comes to investing. CTL’s free cash flow (“FCF”) per share for the trailing twelve months was +0.26. Comparatively, SYF’s free cash flow per share was +2.71. On a percent-of-sales basis, CTL’s free cash flow was 1.59% while SYF converted 12.02% of its revenues into cash flow. This means that, for a given level of sales, SYF is able to generate more free cash flow for investors.Liquidity and Financial Risk
CTL’s debt-to-equity ratio is 1.59 versus a D/E of 1.50 for SYF. CTL is therefore the more solvent of the two companies, and has lower financial risk.
CTL trades at a forward P/E of 18.02, a P/B of 0.85, and a P/S of 1.03, compared to a forward P/E of 6.66, a P/B of 1.54, and a P/S of 1.29 for SYF. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. CTL is currently priced at a -7.33% to its one-year price target of 20.18. Comparatively, SYF is -32% relative to its price target of 43.60. This suggests that SYF is the better investment over the next year.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. CTL has a beta of 0.78 and SYF’s beta is 1.00. CTL’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. CTL has a short ratio of 9.62 compared to a short interest of 1.72 for SYF. This implies that the market is currently less bearish on the outlook for SYF.Summary
Synchrony Financial (NYSE:SYF) beats CenturyLink, Inc. (NYSE:CTL) on a total of 10 of the 14 factors compared between the two stocks. SYF higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. SYF is more undervalued relative to its price target. Finally, SYF has better sentiment signals based on short interest.